What is the energy price cap?
The energy regulator Ofgem has announced that the price cap will decrease to £3,280 for Direct Debit customers on a standard variable tariff from 1 April 2023. Ofgem’s announcement will not affect what customers pay for each unit of electricity or gas because that is limited by the government’s Energy Price Guarantee.
Ofgem’s April 2023 price cap has been announced, so we thought it would be the right time for a quick refresher. Understanding your energy prices can feel confusing, especially over the past year when there have been so many changes. That’s why we’ve broken it down for you. Plain and simple.
What is the price cap?Simply put, the price cap is the maximum price per unit that your energy supplier can charge you for your energy. It also includes the maximum they can bill you for your standing charge too. The price cap figure is an average, you will pay more or less depending on your energy consumption.
The government introduced the price cap in 2019 to protect consumers from paying too much for their energy. It is set by the energy regulator Ofgem and reviewed four times a year.
What is changing in the April 2023 price cap?Ofgem has announced the price cap is changing on 1 April 2023. Standing charges will increase slightly and unit rates will decrease. Overall, the price cap will decrease to £3,280 per year for an average household.
Currently, the price cap is set at £4,279. This came into effect on 1 January and will end on 31 March 2023.
However, it is important to note that, despite reductions in the price cap on 1 April 2023, your bills will be rising due to changes in government support.
How will the April 2023 price cap affect your bills?Due to the government’s Energy Price Guarantee (EPG), the price cap is currently not determining the amount you pay for your energy.
The Energy Price Guarantee is a discount on consumer energy prices that aims to keep the average household bill below £2,500 a year to reduce the impact of recent rises in wholesale energy costs. Since this has been below the price cap, you have been receiving a discount, automatically applied to your bills, to keep them in line with the EPG. When the price cap falls below the threshold of the EPG you will no longer receive a discount and the price cap will once again solely determine your energy prices.
However, the government is also making changes to the support you currently receive towards your energy bills from 1 April.
On 31 March 2023 the government’s £400 Energy Bills Support Scheme will end. This means that from 1 April 2023 you will no longer get the £66 or £67 discount off your energy bills each month.
The government has decided to keep the EPG at £2,500 from 1 April 2023 for a further 3 months instead of the planned rise to £3,000. The April price cap will still be higher than the EPG set by the government, and so you will still be getting a discount on your bills.
Overall, the ending of the EBSS means that you'll pay a little more for your energy from 1 April 2023.
We have a range of financial support and independent advice available to help you through the upcoming changes. Learn more and get support with rising bills.
How is the price cap calculated?The price cap is calculated based on multiple factors that make up the cost of supplying your energy. However, wholesale energy prices are usually the main one that affects changes. In fact, wholesale prices are responsible for around 75% of the cost of the average energy bill (on tariffs equal to the price cap)*.
What makes up the price cap:
- Wholesale prices. These are prices that suppliers like us typically pay when buying gas or electricity to supply our customers. The supplier purchases energy for their customers on the wholesale market far in advance of when they need to supply that energy to you.
- Adjustment allowance. This is an allowance for any unexpected extra costs that may arise, such as from supplier failures.
- Operating costs. These represent the costs to your supplier to deliver its services to you. They include sales, metering, billing, and general customer service costs.
- Network costs. These costs are for maintaining, running, and upgrading the gas pipes and electricity cables that carry energy across the country into your home or business. Network companies charge your supplier an Ofgem-regulated price for using the energy network.
- Policy costs. These costs relate to government led social and environmental schemes, such as the Feed in Tariff and Renewable Obligations schemes which are designed to help reduce emissions, save energy and encourage the transition to renewable energy.
- VAT. Value Added Tax is set at 5% for energy bills.
- Payment method costs. Ofgem have set a Payment Method Uplift, to account for the additional costs associated with providing service to customers who don’t pay by Direct Debit. This is also why it is often cheaper to pay for your energy by Direct Debit.
- Smart. The Government is committed to making sure all households and small businesses can benefit from smart meters as soon as possible. The smart meter rollout allowance was introduced in June 2020, to help cover the cost of supplying them to customers. Interested in getting one in your home? Learn more about the benefits of smart meters and book your installation.
- Headroom allowance. This is a small extra allowance for uncertainties in the costs incurred by suppliers.
- Earnings. Ofgem accounts for a fair rate of return for energy suppliers within the price cap. This makes up around 2% of the average bill*.
Rising bills help.We want to reassure you that we are dedicated to helping you where we can. We have put together some helpful resources where you can access support from us, charities and the government.
Contact our Energy Specialists if you’re having difficulty.Our Energy Specialists are here to help you if you’re concerned about your energy bills or need advice with moving. If you’re struggling to pay, please visit our help page to find out more about how we can support you. You can reach out to our Energy Specialists for personal advice on Facebook and Twitter.
Feel the Community power.The E.ON Next Community is a space for customers just like you, sharing their experiences to offer a helping hand. Find support or suggest your own unique topics, plus get involved in discussions of all the latest news. Join the conversation now.
Blog published: 15/03/23